Exodus from Russia renews concerns about US pensions investing in emerging markets

Pressure has mounted in recent weeks on US pensions to shed Russian assets, but politicians striving to unwind the investments face a greater moment of truth: what about their holdings in other autocratic regimes?

Russian President Vladimir Putin’s invasion of Ukraine has prompted many of the largest public pension plans to quickly divest from Russian stocks or cut their exposure to harder-to-exit allocations. The first-of-its-kind move to exit so abruptly called into question retirees’ asset positions in other emerging markets, specifically China, where there is greater geopolitical risk.

For the most part, Russian assets comprise a small portion of US pension investment portfolios. On the other hand, the exposure to China, albeit indirectly through international indices, is much higher. And as retirement plans quickly say no more to Russian investments, onlookers have renewed the focus on Chinese investments.

TO survey conducted by Invesco Last year’s survey of 200 institutional investors worldwide found that 86% of respondents maintained or increased their exposure to China during the one-year period through June and July, with 64% expecting more increases in the coming year. Only 12% reported a reduction in their exposure to China.

Institutional investors put money in China for a number of reasons, including expectations of growth and potential expansion of China’s economy and earnings of publicly traded companies and improvement in the quality of financial intermediaries within the country, according to Invesco. . In addition, the pandemic has increased China risk appetite among more than half of those surveyed.

The appeal of high-growth Asian assets, and in particular Chinese, is clearly present for many pensions as they seek the returns necessary to meet funding needs. But the degree to which institutional investors highlight China exposure has varied significantly.

The Tennessee Consolidated Retirement System in Nashville has been free of investments tied to Russia and China thanks to a screening methodology in place for nearly a decade by the State Department of the Treasury used to assess nations eligible to invest in the markets portfolio. emerging.

The process assesses each emerging market country against The Economist magazine’s Global Democracy Index and the Corruption Perception Index created by Transparency International. Investments in countries that score poorly on a combination of indices are not considered for the portfolio.

According to The latest indicator of democracy from The EconomistChina accounts for most of the substantially more than a third of the world’s population (37.1%) living under authoritarian rule.

“The Tennessee Department of the Treasury believes in the rule of law and democracy and that those attributes make for sound investments,” a spokesperson for the state agency told Yahoo Finance.

Chinese President Xi Jinping has a video call with U.S. President Joe Biden at the latter's request in Beijing, capital of China, on March 18, 2022. (Photo by Liu Bin/Xinhua via Getty Images )

Chinese President Xi Jinping has a video call with U.S. President Joe Biden at the latter’s request in Beijing, capital of China, on March 18, 2022. (Photo by Liu Bin/Xinhua via Getty Images )

Before the Minnesota House of Representatives approved a plan on Thursday to withdraw $10 million in state investments from Russia and Belarus, Republican lawmakers sought to add provisions that included a ban on appropriations to China and 15 other countries. But the proposals were scrapped before House members finalized the bill for a vote.

The move would be far from the first effort by government leaders to try to get American retirement dollars out of the Asian country.

Just last year, a bipartisan group of senators led by Republican Marco Rubio and Democrat Jeanne Shaheen reignited attempts to ban the half-billion-dollar Federal Thrift Savings Plan (TSP), the nation’s largest retirement plan, from investing in any Chinese value in a track. to the extent of The Trump administration’s 2020 suspension of efforts to shift TSP assets to an index fund that included Chinese companies. It is because of that effort that the TSP has no holdings in Russia, and now recently introduced legislation seeks to bar the federal plan from making future changes that would allow federal employee retirement funds to be invested in Russian companies.

In December, Florida Governor Ron DeSantis also launched an audit of Florida’s main pension system, the $200 billion State Administration Board, to review any of its investments linked to the Communist Party of China.

In this Feb. 24, 2022 photo, Florida Governor Ron DeSantis addresses the 2022 CPAC conference at Rosen Shingle Creek in Orlando.  (Joe Burbank/Orlando Sentinel/Tribune News Service via Getty Images)

In this Feb. 24, 2022 photo, Florida Governor Ron DeSantis addresses the 2022 CPAC conference at Rosen Shingle Creek in Orlando. (Joe Burbank/Orlando Sentinel/Tribune News Service via Getty Images)

“The United States as a whole should disassociate itself from China,” DeSantis said at the board meeting in December. “But certainly our investments should be unraveling.”

‘An attention call’

Pennsylvania state senator John DiSanto was among the critics of a recent move by the state SERS pension fund (of which he is a board member) to sell Russian investments, arguing that a fire sale of assets could result at a loss for the plan while providing an opportunity for Russian businessmen and oligarchs to buy shares at a cheaper price and make big profits if Russia’s financial situation recovers.

DiSanto emphasized that he was against the Russian war, but had fiduciary concerns about whether the token pension gesture was worth the loss. After debating whether to cancel his allocation to Russian equities and take a loss or hope for a recovery, the plan advanced to sell. At the time, the value of his stake fell sharply to $7 million in early March from $60 million late last year.

DiSanto’s concerns revolved around how abruptly the plan to boot up Russian assets was moved when pensions should be discussing similar geopolitical risks more broadly. Some critics have raised separate questions about why retirement plans kept investments in the country even as pre-war warnings came.

“The underlying issue I have is that legislatures should make this decision on what we should or shouldn’t invest in like we did with Sudan and South Africa before,” DiSanto told Yahoo Finance. At that time, more than a decade ago, decisions to divest from Sudan and South Africa for human rights abuses were made more cautiously and in consultation with pension investment advisers. “And that leads me to think, should we review engagements on a lot of these issues like with Russia, but with other autocratic states like China?”

DiSanto also singled out investments in OPEC for its refusal to supply more oil to the system as an alternative to Russian oil, and India, which has not supported the United Nations resolution against Russia.

“I think this has really given us a wake-up call that we should be looking at a lot of these issues that we’re investing in and making sure they’re what’s best for our plan holders,” DiSanto said.

The question around this type of investment is not just moral, but fiduciary about geopolitical risk management and how sustainable it is to invest in countries with similar regimes.

“This situation has heightened the perception of risk about how quickly things can go wrong with an investment in a country that is less stable in terms of its geopolitical risk,” said Steve Foresti, chief investment officer at the firm. Wilshire Institutional Investment Advisory. Consulting, he told Yahoo Finance in an interview. “I don’t think any institution that has invested in emerging markets has done so thinking the risks weren’t elevated compared to buying large-cap, blue-chip US stocks, but it’s still eye-opening when you see the whole country of Russia mark zero”.

The global response with economic sanctions that has effectively shut Russia out of the global financial system is likely to have a profound and long-term impact on the way other countries think about their investments, Foresti said.

“There are many collateral implications that are much greater than the weight that Russia represents in emerging markets or in the stock market,” he added. “Do you get a sharper focus on some of the risks embedded in the other countries that are included in these emerging market indices?”

TO recent morningstar report He notes that missing out on the risks of investing in Russia was understandable given the small portfolio composition it represents for most diversified investors, but exposure to China is harder to miss.

“China has been an incredibly lucrative emerging market to invest in, but there has been very little discussion of the regime.” said Jon Hale, director of sustainability research for the Americas at Morningstar.

The question for investors is whether “is it really sustainable in the long term to invest in these types of countries,” he said, calling it “a systemic risk that we are all contributing to and that we should pay more attention to.”

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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